STANLIB webinar: Where to next for fixed income investors?

STANLIB Flexible Income Fund adapts to recent local and global policy upheavals

The STANLIB Flexible Income Fund has undergone notable adjustments in the last two months in response to shifting global and local economic conditions, including US tariff hikes, the potential US tax changes, and the South African Reserve Bank’s (SARB) lower inflation target.

For the STANLIB Fixed Income team, “discipline beats drama”. The team focuses on fundamental, bottom-up research and macroeconomic factors rather than media headlines. They are active managers, constantly searching for investment opportunities in deviations from fair value or historic means.

Global Macroeconomic and Market Views

Key global macroeconomic issues and how these are shaping the team’s positioning:

We anticipate an environment of lower growth and higher inflation.
US bonds may weaken further, but this depends on the effects of the tax bill currently being considered by the US Senate.
Shorter-dated (two- to 10-year) US bond yields have declined since the beginning of the year, but the 30-year yield has risen. This reflects concerns around tariff-induced inflation, fiscal sustainability and dollar weakness.
It is becoming increasingly expensive for the US to service its increasing debt, and maturities are being rolled over at a higher rate. The increase in US debt from about $25 trillion to about $40 trillion, if the tax bill is passed in its current form, will significantly raise debt servicing costs.
The US primary deficit is forecast to remain negative as the government will continue to spend more than it is earning.
Given these risks, foreign investors in US bonds, who account for about 30% of the total, are now demanding a larger premium to hold longer maturity US debt.

South African Fixed Income Market Outlook

Key SA macroeconomic issues and how these are shaping the team’s positioning:

Weaker medium-term economic growth forecasts will worsen the debt-to-GDP ratio. Structural reforms are crucial for improving real yields.
SARB’s new 3% inflation target aims to reduce long-term inflation expectations but may result in higher interest rates short term, potentially sacrificing some growth.
One further 25 bps SARB rate cut is expected, likely in July. While short-term inflation pressures remain, there is room for limited monetary easing without undermining the rand.
Global macro trends will play a larger role than domestic factors in influencing local bond market performance in the coming months.

STANLIB Flexible Income Fund Positioning

True to the STANLIB Flexible Income Fund’s mandate, the team has dynamically adjusted portfolio exposure in response to market conditions.

Reduced exposure to long-duration global bonds due to inflation risks and likely US dollar strength if growth and inflation remain resilient.
Opportunistic dollar purchases were made during rand strength.
On the local front, shortened duration in response to persistent local inflation and limited rate cut expectations.

Current asset allocation

~30% in credit
~30% in cash
~22% in nominal bonds
Renewed interest in inflation-linked bonds (ILBs)
Offshore bonds viewed as least attractive

Performance

The fund returned 14.5% gross return over the one-year period to end-April, outperforming its benchmark by 5.4% (source: Statpro). Over three to five years, it has consistently outperformed by around 3% annually.